Friday, 21 February 2014

Capitalism Deniers: The myth of 'market failure'

Nicholas
(Lord) Stern, former World Bank chief economist and author of the 2006 British
government-commissioned Report on the
Economics of Climate Change, reared his ennobled head again last weekend to
point out that the fact that roughly a third of Southern
England lay underwater was “a clear sign” of climate change.

The
flooding in England is
likely to play a similar role to that of Hurricane Sandy in the US – nature’s
way of cutting through ideological conceits in a fashion that no amount of
rational debate can achieve. Milton Friedman’s “brute experience” is trumping
ideological preference again, though in ways he never imagined.

Stern’s
intervention was, nonetheless, seen as a rational retort to the angry band of
climate deniers, and on a more unconscious level, a reassurance that, beyond
the media flotsam, those in the higher echelons of power really do “get it”.
However, despite his reputation as the voice of reason, Stern, I believe, is a
leader of a different band of unreasoned deniers – those that deny the effects
of capitalism. And, disturbingly for the future of the planet, this band has
far more adherents than the ones who think the polar ice caps are melting because
of increased heat from the sun.

“Climate
change is the greatest market failure the world has ever seen,” proclaimed
Stern famously in his 2006 report. The headline use of the phrase might seem,
on the surface, to mark Stern out as an enlightened critic of capitalism.
Indeed, since he effectively minted the term for general use, meaning examples
of markets working against, not for human welfare, “market failure” has become
a meme, trotted out with metronomic regularity whenever instances of markets
damaging general welfare occur. And that means a lot of trotting.

In early
February when revelations broke that a third of the food consumed in Britain may not
be what it claims on the packet, the man in charge of the government’s review
of the horsemeat scandal, warned that the nation was at risk of “market failure”. The spiralling of inequality, which has seen just 85 people in the world controlling more wealth than half the world’s population, is frequently
portrayed as an outbreak of market failure. The neo-Keynesian economist Ha-Joon
Chang says that the managerial classes “manipulate the market” guaranteeing
themselves enormous executive pay rises that bear no relation to performance.
Last October, the New Statesman magazine encapsulated falling wages, a few
companies controlling the energy market and extortionate housing rents as “market failure on a grand scale”.

But, in
truth, “market failure” is a superlative example of newspeak that would have
made George Orwell proud had he coined it. For these market failures are not,
as is implied, regrettable aberrations requiring governmental correction, but
simple and predictable market outcomes.

Market outcome No. 1 – Climate change

“When free
markets do not maximise society’s welfare,” opined an article in The Guardian newspaper in 2012, “they
are said to fail and policy intervention may be needed to correct them. Many
economists have described climate change as an example of market failure.”

The reason
is that greenhouse gases are an externality. A company may produce a product
people want but as a result of producing it, or transporting it, will emit
greenhouse gases. And the effect of these emissions will fall on people on the
other side of the planet or future generations. That is why Nicholas Stern said
climate change was the greatest market failure the world had ever seen. The
gaping hole in this argument is that externalities, of which greenhouse gases are
a prime example, are not by-products of capitalism that can be washed away by
government regulation. They are an integral and unavoidable part of its
functioning. A report for the UN in 2010 found that one third of the profits of
the world’s top 3,000 companies, some $2.2 trillion, would be wiped out if they
were forced to pay for the use, loss and damage to the environment they cause.
And more than half of that $2.2 trillion total, was attributed to damage caused
by the release of greenhouse gases. Force corporations to give up a third of
their profits and you will essentially destroy them – no-one will invest in
them because the profits will be so meagre. That is why no government or pan-government
authority, like the EU, will ever insist that corporations pay for all
externalities, or they stop producing all externalities.

This has
been brought into sharp relief by the immensely fragile state of the world
capitalist economy. The priority of government policy around the world is not
to impede economic growth, even if growth stubbornly refuses to return to
anything like the levels of 40 years ago, which only, ironically, strengthens
the desire not to impede growth. It is for this “reason” that the UK government
has backed such fundamentally anti-environmental policies such as the car
scrappage scheme and fracking. And most people, under this system, have clear incentives to support such
short-term, growth friendly policies, overriding any concerns they have about
climate change that is now happening all around them. Executives just work for
the profit maximising interests of their corporate employers. The interests
mean constantly inventing new needs and requiring consumers to upgrade to new
technology. In 2006, the late Apple boss, Steve Jobs, the man who “anticipated
technological desires you didn’t even know you had”, urged customers to buy an
iPod every year to keep up with advancing technology.

The vast
majority, meanwhile, simply need jobs and incomes so are materially dependent
on the success of those corporations. “Economic
growth is in the immediate interest of virtually every sector of society –
growth in the straight-forwards sense as measured by GDP,” notes American mathematician
David Schweickart in his book, After
Capitalism. That’s why leftists say the problems caused by capitalism are
systemic. They are not the result of greed or stupidity.

Growth is thus endemic to a
capitalism that functions remotely effectively. It is illuminating that carbon
emissions fell for the first time in 50 years in the immediate aftermath of the
financial crisis, when growth stopped happening, but have since started rising again as a fragile recovery has taken hold. Growth of 3% a year means a
doubling of the size of the economy every 23 years and, according to a
professor at London’s Imperial College,
“each successive doubling period consumes as much resource as all the
previous doubling periods combined.” 3% growth may seem ambitious for western
countries, but it isn’t for “emerging economies”. About a dozen have grown at
around 7% a year for the past quarter century. Since 1978, since the beginning
of its transformation from communism to capitalism, the Chinese economy has
trebled in size.

The dangerous fiction peddled by
capitalism deniers such as Nicholas Stern is that you can have economic growth
and reduce greenhouse gas emissions at the same time. Stern says the world
needs a low carbon industrial revolution, which is undoubtedly true, and that China is
leading the way in developing low carbon technologies. But China also boasts 16 of the 20 most polluted
cities in the world and chronic air pollution – two-thirds of urban residents
in China
are breathing air that is severely polluted. China occupies a pivotal place in
the world’s capitalist market economy, whereby its factories assemble the parts
and components made in other countries (like the iPhone) in order to export
finished products back to the West. If you want to impede global warming, never
mind halt it, that process, I would suggest, has to be severely curtailed. But
it is at the crux of many corporations’ supply chains because Chinese workers
are so much cheaper than those in the West. Under a globalised market, growth
and global warming will inexorably continue.

Stern, who is chair of the Grantham Research Institute on Climate
Change and the Environment at the London School of Economics, would do well
to listen to the man who founded that Institute, the investor (and arch
capitalist) Jeremy Grantham. “There is no such thing as sustainable growth” he said in 2011. “You have to make a pick. You can have sustainability or you can
have growth, but you can’t have both.”

Market outcome No. 2 – Inequality

A new book by the French economist
Thomas Piketty, Capital in the
Twenty-First Century, “defies left and right orthodoxy”, says the New York Times “by arguing that worsening
inequality is an inevitable outcome of free market capitalism”. Analyzing data from
over 20 countries, Piketty concludes that that the owners of capital inevitably
become increasingly dominant over, and richer than, those that own merely their
own labour. Only “confiscatory tax rates” can reverse this trend in mature
economies. A division between those who own capital and those can only sell
their labour (the system of wage labour), it should be noted, is the essence of
capitalism.

Piketty says that inequality is
driven by a structural feature, integral to capitalism: returns on capital exceed,
usually, the rate of economic growth. The more “perfect” the market, he says,
the higher the rate of return on capital and the greater the resultant
inequality.

This analysis cuts through
orthodox economic thinking in two ways. Firstly, it contradicts the
conservative faith that the free market will naturally distribute “the fruits
of economic progress among all people.” It won’t, as is becoming abundantly
clear. Secondly, Piketty says that traditional liberal or social democratic
antidotes to inequality – public spending, taxation and regulation – won’t dent
it. Government can’t, even if it wanted to, reverse this form of market
failure. You have to go, I would suggest, to the root of the issue; the lack of
power most people have when bargaining for pay from employers.

Inequality has become extreme in
many western countries, notably the US
and UK,
as trade unions have been edged out, or forcibly removed, from the picture.
Trade unions are the grit in the ointment of pure free market capitalism. They entail
collective, as opposed to individual, bargaining. Countries that have not
destroyed trade union influence, and thus retained collective bargaining, have
far less inequality. Chief executives in Norway, for example, earn less than
double the average wage. 70% of workers are covered by collective bargaining
there, compared to 29% in the UK.

So individual bargaining - the ‘tao’
of a free market - leads to grossly inflated inequality. While it is portrayed
as paying people what they are worth, individual bargaining merely results in
the wages and salaries that people are able to negotiate. Those at the top of
society have the negotiating strength to insist they are paid, not what they
are worth, but vastly more than their contribution to company or organisational
performance. “When pay setters set their own pay, there’s no limit,” says
Piketty. FTSE chief executives can negotiate ever-rising pay settlements, while
wealthy investors sit back and receive the fruits of the returns on their
investments.

This is not about the manipulation
of the market, but a reflection of where market power lies. It is not a market
failure, not a 'power grab' by the wealthy as Oxfam imagines, nor a “perversion” of the market, as right-wing journalist Charles
Moore would have it. It is a market outcome. The same imbalance of power means that the “confiscatory tax
rates” that Piketty posits as a redress to inequality will not be allowed to
happen.

Market outcome No. 3 – Oligopoly

Oligopoly means the dominance of a
small number of firms in particular markets that work to prevent smaller firms
entering it, as a result of their strong position, and hike up prices to
captive consumers. As the New Statesman magazine observed in 2013, the energy
market in Britain
is the epitome of an oligopoly. Six companies rule the roost and have presided
over increases in electricity prices of 120% over the past decade. While energy
costs have risen by less than inflation over the past year, the typical bill
has shot up by more than £100.

The problem with ascribing this
state of affairs to market failure is that it’s a pretty ubiquitous kind of
failure. Oligopolies are also conspicuous in the UK in public transport, car
manufacture, banking, outsourced government services and supermarkets – to name
a few areas. The value of mergers and acquisitions, globally, hit a peak of
over $4 trillion in 2007. The effect of mergers and acquisitions is to create
larger and larger corporations and strengthen oligopoly. The process is, in
other words, is getting worse. “The result of all this merger activity has been a decline in the number
of firms controlling major industries,”write
the authors of The Endless Crisis, a
book about how monopoly capitalism causes economic stagnation.

It was one Karl Marx who first
noticed the pronounced tendency towards concentration in capitalism. Competition
leads firms to either drive their rivals to the wall or take them over and thus
results in its antithesis, monopoly and oligopoly. It is possible for the
government to insist that oligopolistic markets are broken up – the British
Labour party wants to introduce more competition into a banking system in which
five banks possess 85% of current accounts, for example. But should this fragmenting
occur, the counter-veiling market trend will immediately kick in. Competitive
markets are not natural to capitalism.

A strange philosophy

The market failure doctrine shines
a light on the intellectual dead-end of European social democracy and American
liberalism. They recognise – how could it be otherwise? - the anti-social
impacts of markets but can’t surmount a fatalistic acceptance that those
anti-social impacts, like the poor, will always be with us. Only a benevolent
state, it is believed, can intervene to mitigate the situation. Social
democracy is a ‘bonkers’ way of running an economy, Doreen Massey, co-founder
of the Soundings journal, said
recently. “First you produce a problem, then you try and solve it”. Is it too
utopian to suggest that you should endeavour not to produce the problems in the
first place?

This practical utopia requires radically
re-organised systems of production and markets. I don’t want to underplay the
problems. The externality issue that is central to the dilemma of climate
change would not be resolved by worker-controlled firms or companies that
involve the local community in how they are run. If the effects of global
warming fall on people on the other side of the world or not yet born, there is
no inherent reason why these firms should be attentive to them. But climate
change will never be addressed by the globalised market economy of corporate capitalism.
The interests of the environment and the interests of shareholder-ownedcorporations, legally obliged to maximise
profit, are in irresolvable conflict.

What the centre-left offers, at
best, is the state as fireman, dousing the flames wherever they arise yet
remaining oblivious to who is setting the world on fire. It is time to
recognise that the fireman, even if he has an unwavering commitment to duty, is
not up to the task.

2 comments:

Brilliant piece - made me laugh aloud whilst wincing at the insanity and injustice of it. A good approach to make us laugh through our tears! Lots of killer facts here - how long did it take you to put together? And how did you know to go for the UN report, were you already familiar with it? It rather sweeps the carpet from under the feet of Stern et al...

Many thanks for the comment, I'm glad somebody reads the blog! The UN report I just read about in the paper when it came out and kept the link. If my local library hadn't stopped buying the Financial Times two years ago, this blog would be better informed. I think it took about a day or two to write. Writing's not a problem but assembling the facts and links takes time. Wish I had the time to post more.

About Me

Capitalism is not beautiful, said John Maynard Keynes. It is not intelligent, it is not virtuous and it not just. “But when we wonder what to put in its place, we are extremely perplexed.”
This blog is about the ideologies that mask the ugliness and injustice beneath the surface. And how our perplexity might be diminished.
You can contact me at idealogically@gmail.com